EUR/USD remained inside a short-term channel as markets waited for ECB President Christine Lagarde to open the ECB’s Sintra symposium at 13.30ET. The forum, titled “Shaping Europe’s Future; Innovation, Growth and Stability”, features senior policymakers this week, including Fed Chairman Warsh and BoC Governor Macklem on Wednesday. Past Sintra gatherings have generally had limited influence on near-term price action.
The pair was characterised as neutral to bullish after last week’s move up from the low 1.13s, but it met resistance around 1.14. Spot was described as sitting mid-range within a channel running from 1.1360 to 1.1450, leaving it pinned in a band. A break above 1.15 was cited as the threshold needed to improve the euro’s recovery prospects.
Central Bank Policy Divergence and Market Range
We see the Euro trading in a tight range against the US Dollar, and we expect this to continue in the coming weeks. Markets are waiting for comments from ECB President Lagarde at the Sintra symposium, but this event has historically not caused major price swings. The pair seems stuck, with traders hesitant to take large positions.
The fundamental reason for this is the divergence in central bank policy. Recent data shows Eurozone inflation has eased to 2.1%, while U.S. core PCE inflation remains more persistent at 2.9%, delaying the Federal Reserve’s easing cycle. This policy gap is keeping the EUR/USD capped, currently holding between 1.0800 and 1.0900.
Options Strategy and Range-Bound Outlook
Given this outlook, we believe selling options is the most prudent strategy for the next few weeks. The market is pricing in low volatility, with the 1-month implied volatility for EUR/USD sitting near 5.8%, which is on the lower end of its five-year average. Selling strangles with strikes outside the 1.0750 to 1.0950 range allows traders to collect premium as time passes.
This strategy profits from the pair remaining within its established channel, which we see as the most likely scenario. We are looking at the period through the mid-July options expiry. History shows that during similar periods of central bank divergence, such as in 2014-2015, long periods of range-bound trading were common before a clear trend emerged.
However, we must be prepared for a potential surprise from the Sintra event. To hedge against a sudden breakout, traders could buy cheap, far out-of-the-money options. This provides protection for a small cost if the market moves sharply in either direction.
For our range-trading view to change, we would need to see a sustained break above the 1.0950 resistance level. Only a move like that would signal a stronger recovery for the Euro. Until then, we will continue to trade the range.
